In short, it could be described as depending upon how much income you have. In fact that is how debt is measured. When a loan officer at the bank or the underwriter of a mortgage loan reviews your credit and calculates your debt to income ratio; they divide your debts into you income. That in turn renders your debt load or debt to income ratio.
There are benchmarks that the banks use for consumer loans. It can depend upon certain other criteria about your credit profile. To include but not limited to: your credit score, how you have paid your past accounts with them, liquid checking or savings accounts, and if there is a long term banking relationship as to how high the debt to income can go. That may not always be the position a bank takes, as each bank operates differently in some facets of their policies and procedures. They do have a benchmark at somewhere in the range of 40 percent of gross income.
Mortgage lending calculates the housing debt to income no higher than 31+- and total debt to income ratio to 41+- percent. This is a benchmark only and if the loan is run through the agencies (Fannie or Freddie’s) automatic underwriting system and the assets, credit scores and other financial criteria is acceptable; the debt to income may sometimes rise to 45 percent. The agencies Fannie Mae and Freddie Mac have re-evaluated their stance on all products with regard to credit score limitations, debt to income ratios and loan to values. In the most recent years; the debt to income was often acceptable to 55 percent and most of us now know that those benchmarks have left a mark on our country that we could have done without. Regardless, in both banking and mortgage banking; it will depend usually upon the entire financial and credit worthy status of the consumer.
That being said, what happens in the credit evaluation is that people, even the most educated in the field; seem to sometimes forget that they have those things to continue paying that are not titled; debt. This being everyday expenses to include: utilities, child care, phone bills, home, car, and life insurance, groceries, cleaning supplies, lunch at work or school, school tuition, doctor visits, that hamburger on the run and many other miscellaneous things we could mention. So, with further clarity it seems that how much debt is too much should be labeled as when you have to worry about providing you and your family with the necessities of life.
Necessities of life should be considered prior to creating any debt. Even though these necessities are not counted in a person’s debt to income ratio; they should be in the back of a consumers mind as significant. For instance, a new car is no good to anyone if they can’t afford to buy the gasoline and pay the insurance. A mortgage company will not loan money if the home insurance is not paid and the house is not much benefit without the utilities. The children must have their education to have a future and if they are small they must have child care if the adults continue working.
In light of the above; why do people not consider the fact that to function in life one must be able to meet their obligations in a timely manner and have certain everyday things that cost money to survive in a healthy way of life?
Money or income of course, is the solution to how much debt one can afford and if they can maintain their personal needs also. When the credit scores are calculated on ones credit report; the number of accounts is taken into consideration. If there is excessive accounts; which has been known to occur, pages and pages of open account; the score can be affected, even if most of the accounts are paid as agreed. It will say something to the effect of; “excessive use of credit.”
Summary:
As in all things, individual circumstances are different. Usually those people who tend to limit their credit obligations have a better outlook on life, feel more secure in living and are able to meet with financial emergencies when they occur. They do not lose sleep at night nor do they have to worry as much as those who over-extend themselves.
In this analysis, as previously stated; too much debt is when you have to sit down and try to rationalize how you are going to meet your credit obligations, feed the family, pay utilities and maintain a healthy life style. This may sound rather blunt, but it is rather significant.